Canada: Spring Loading Recognized As An Offence Under The QSA In Québec

On August 9, 2016, the Tribunal administratif des
marchés financiers (the
"Tribunal") formerly known as the
Bureau de décision et de révision en valeurs
mobilières (or BDRVM), rendered a two-part decision,
the second part of which involved what is known as "spring
loading", now recognized as an offence under the Québec
Securities Act1. The case involves accusations of tipping
and insider trading in connection with a verbal offer by Open Text
Corporation ("Open Text") to acquire
Nstein Technologies Inc. ("Nstein") at a
time when Nstein was seeking to be bought out. This is the first
Quebec decision dealing with "spring loading", an offence
that finds its origin in U.S. case law.

The first part of the decision deals with Pierre
Légaré, the accountant of the chief executive officer
of Nstein, Luc Filiatreault, who was accused of tipping. After
having been informed by Mr. Filiatreault of Open Text's offer
to acquire Nstein, Légaré traded on Nstein's
shares while in possession of allegedly privileged information,
making a profit of $15,765. An agreement was reached between the
regulator, the Autorité des marchés
financiers (the "AMF") and Mr.
Légaré whereby he agreed to pay an administrative
penalty of $23,500, representing 150% of the profit he made trading
on Nstein's shares. Considering, inter alia, his
transparency and the remorse he showed, the TAMF approved the
administrative penalty under the agreement.

The second part of the decision concerns accusations against the
members of Nstein's board of directors and some of its senior
officers for having adopted a resolution authorizing the
corporation to issue 1,200,000 options to purchase its shares at a
time when those individuals were in possession of allegedly
privileged information regarding the potential acquisition of
Nstein by Open Text. The directors and senior managers involved
were thus accused of "spring loading"2 by the AMF:

[72] This was essentially a financial stratagem initiated by
senior management of a reporting issuer who were in possession of
privileged information, which consisted of issuing options to
purchase shares of the issuer at their market price, knowing full
well that the price of those shares was likely to increase
substantially in the near future, when the privileged information
became publicly known.3

Open Text's verbal offer to acquire Nstein was made in
November 2009 by Open Text's chief executive to Mr.
Filiatreault, who then informed Nstein's board of directors of
it. The corporation gave serious consideration to the offer and
took steps to further it. A few weeks later, in January 2010, the
members of the board, including Mr. Filiatreault, signed a
resolution authorizing Nstein to issue 1,200,000 options to
purchase shares of the corporation, at a time when they were in
possession of alleged privileged information, and when a
prohibition on trading in the corporation's shares (a
"blackout" period) was in effect for all insiders and
employees of the corporation. Some of Nstein's senior officers
also accepted such options at a time when they were in possession
of the alleged privileged information.

The directors and officers of Nstein targeted by the accusations
of the AMF argued first of all that they had not in fact traded on
any of Nstein's securities. In the alternative, they pleaded
various grounds of defence, including the following:

the granting of the options was not
done by Nstein's board of directors, but by the corporation
itself, as a legal person, thereby giving the respondents the
protection of the corporate veil;

the decision to grant the options
preceded any discussions with Open Text;

in the alternative, the grant of the
options was "necessary" in the course of Nstein's
business, within the meaning of paragraph 2 of section 187 of the
Securities Act;

they were not in possession of any
privileged information as defined in section 5 of the
Securities Act, and

they received no benefit, pecuniary
or otherwise, as a result of the granting of the options.

In its analysis the TAMF pointed out that "the spirit
and the letter of the Securities Act enshrines the fundamental
principle of the equality of all investors in terms of the
possession of information when engaging in trades in the securities
of reporting issuers"4.

The TAMF rejected all of the grounds raised by the directors and
officers of Nstein in their defence. With respect to the argument
that the granting of the options was "necessary" in the
course of Nstein's business, within the meaning of paragraph 2
of section 187 of the Securities Act, the TAMF stated the
following:

[118]The Tribunal is of the view that if it
were to characterize such an operation as "necessary in the
course of business" of a reporting issuer, it would be opening
the door to a potential multitude of similar stratagems whose
deleterious effects would circumvent the application of an
obligation under the Securities Act that constitutes the very basis
of the equitable regime put in place by the legislature governing
the use of information. The consequences of such a decision would,
in the Tribunal's view, be nothing short of disastrous, and the
Tribunal is accordingly not prepared to go down that
road.5

According to the TAMF, in light of the serious nature of the
offences committed by the directors and senior officers of Nstein,
the strategic management positions they held during the period
covered by the accusations, and their lack of remorse, the TAMF
took the view that "it is essential to take appropriate
measures to protect the investing public and to ensure the
integrity of the markets6. The TAMF accordingly imposed, as a
dissuasive measure, an administrative penalty of $180,000 for Luc
Filiatreault the CEO of Nstein, of $72,000 and $36,000 for the two
other Nstein officers involved, $30,000 for the chair of
Nstein's board of directors, and $20,000 for the remaining
directors.

Take Away – This decision is interesting
as it is the first in Québec to recognize the offence of
spring loading. By doing so, the TAMF went through a thorough
analysis of the policy underlying insider trading and tipping
offences under the QSA. The board of public companies must be aware
of this decision and of the principles underlying same to make sure
that adequate internal controls and policies are in place to avoid
such unfortunate situations.

Footnotes

1 Autorité des marchés financiers
v. Filiatreault, 2016 QCTMF 8

2 It should be noted that in U.S. case law "spring
loading" has a counterpart known as "bullet
dodging", a term used where the granting of stock options is
delayed until unfavourable news concerning the issuer is made
public, thereby causing the price of its shares to
drop.

3 Supra, note 1, at par. 72
[TRANSLATION]

4 Ibid, at par. 73 [TRANSLATION]

5 Ibid, at par. 118 [TRANSLATION]

6 Ibid, at par. 125 [TRANSLATION]

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Board independence is a pillar of good corporate governance. It ensures that a corporation's management is properly monitored and that the corporation's decisions effectively balance the various stakeholders' interests.

The use of electronic signatures is becoming increasingly commonplace in commercial transactions, as individuals and businesses capitalize on the administrative efficiency afforded by today’s digital world.

This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).

Email Address

Company Name

Password

Confirm Password

Position

Mondaq Topics -- Select your Interests

Accounting

Anti-trust

Commercial

Compliance

Consumer

Criminal

Employment

Energy

Environment

Family

Finance

Government

Healthcare

Immigration

Insolvency

Insurance

International

IP

Law Performance

Law Practice

Litigation

Media & IT

Privacy

Real Estate

Strategy

Tax

Technology

Transport

Wealth Mgt

Regions

Africa

Asia

Asia Pacific

Australasia

Canada

Caribbean

Europe

European Union

Latin America

Middle East

U.K.

United States

Worldwide Updates

Check to state you have read and agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you
are granted a non-exclusive, revocable license to access the Website under its
terms and conditions of use. Your use of the Website constitutes your agreement
to the following terms and conditions of use. Mondaq Ltd may terminate your use
of the Website if you are in breach of these terms and conditions or if Mondaq
Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to
read the full text of the content and articles available (the Content). You may
not modify, publish, transmit, transfer or sell, reproduce, create derivative
works from, distribute, perform, link, display, or in any way exploit any of the
Content, in whole or in part, except as expressly permitted in these terms &
conditions or with the prior written consent of Mondaq Ltd. You may not use
electronic or other means to extract details or information about Mondaq.com’s
content, users or contributors in order to offer them any services or products
which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the
suitability of the information contained in the documents and related graphics
published on this server for any purpose. All such documents and related
graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or
its respective suppliers hereby disclaim all warranties and conditions with
regard to this information, including all implied warranties and conditions of
merchantability, fitness for a particular purpose, title and non-infringement.
In no event shall Mondaq Ltd and/or its respective suppliers be liable for any
special, indirect or consequential damages or any damages whatsoever resulting
from loss of use, data or profits, whether in an action of contract, negligence
or other tortious action, arising out of or in connection with the use or
performance of information available from this server.

The documents and related graphics published on this server could include
technical inaccuracies or typographical errors. Changes are periodically added
to the information herein. Mondaq Ltd and/or its respective suppliers may make
improvements and/or changes in the product(s) and/or the program(s) described
herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally
identifies you, including what sort of information you are interested in, for
three primary purposes:

To allow you to personalize the Mondaq websites you are visiting.

To enable features such as password reminder, newsletter alerts, email a
colleague, and linking from Mondaq (and its affiliate sites) to your website.

Mondaq (and its affiliate sites) do not sell or provide your details to third
parties other than information providers. The reason we provide our information
providers with this information is so that they can measure the response their
articles are receiving and provide you with information about their products and
services.

If you do not want us to provide your name and email address you may opt out
by clicking here .

If you do not wish to receive any future announcements of products and
services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to
view the free information on the site. We also collect information from our
users at several different points on the websites: this is so that we can
customise the sites according to individual usage, provide 'session-aware'
functionality, and ensure that content is acquired and developed appropriately.
This gives us an overall picture of our user profiles, which in turn shows to
our Editorial Contributors the type of person they are reaching by posting
articles on Mondaq (and its affiliate sites) – meaning more free content for
registered users.

We are only able to provide the material on the Mondaq (and its affiliate
sites) site free to site visitors because we can pass on information about the
pages that users are viewing and the personal information users provide to us
(e.g. email addresses) to reputable contributing firms such as law firms who
author those pages. We do not sell or rent information to anyone else other than
the authors of those pages, who may change from time to time. Should you wish us
not to disclose your details to any of these parties, please tick the box above
or tick the box marked "Opt out of Registration Information Disclosure" on the
Your Profile page. We and our author organisations may only contact you via
email or other means if you allow us to do so. Users can opt out of contact when
they register on the site, or send an email to unsubscribe@mondaq.com with “no
disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate
registration form. This is a personalised service where users choose regions and
topics of interest and we send it only to those users who have requested it.
Users can stop receiving these Alerts by going to the Mondaq News Alerts page
and deselecting all interest areas. In the same way users can amend their
personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an
identifying user number. The cookies do not contain any personal information
about users. We use the cookie so users do not have to log in every time they
use the service and the cookie will automatically expire if you do not visit the
Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to
personalise a user's experience of the site (for example to show information
specific to a user's region). As the Mondaq sites are fully personalised and
cookies are essential to its core technology the site will function
unpredictably with browsers that do not support cookies - or where cookies are
disabled (in these circumstances we advise you to attempt to locate the
information you require elsewhere on the web). However if you are concerned
about the presence of a Mondaq cookie on your machine you can also choose to
expire the cookie immediately (remove it) by selecting the 'Log Off' menu option
as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example,
advertisers). However, we have no access to or control over these cookies and we
are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement,
and gather broad demographic information for aggregate use. IP addresses are not
linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or
its affiliate sites) are not responsible for the privacy practices of such other
sites. We encourage our users to be aware when they leave our site and to read
the privacy statements of these third party sites. This privacy statement
applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or
contests. Participation in these surveys or contests is completely voluntary and
the user therefore has a choice whether or not to disclose any information
requested. Information requested may include contact information (such as name
and delivery address), and demographic information (such as postcode, age
level). Contact information will be used to notify the winners and award prizes.
Survey information will be used for purposes of monitoring or improving the
functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our
site, we ask them for the friend’s name and email address. Mondaq stores this
information and may contact the friend to invite them to register with Mondaq,
but they will not be contacted more than once. The friend may contact Mondaq to
request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’
information. When users submit sensitive information via the website, your
information is protected using firewalls and other security technology. If you
have any questions about the security at our website, you can send an email to
webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode),
or if a user no longer desires our service, we will endeavour to provide a way
to correct, update or remove that user’s personal data provided to us. This can
usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will
post those changes on our site so our users are always aware of what information
we collect, how we use it, and under what circumstances, if any, we disclose it.
If at any point we decide to use personally identifiable information in a manner
different from that stated at the time it was collected, we will notify users by
way of an email. Users will have a choice as to whether or not we use their
information in this different manner. We will use information in accordance with
the privacy policy under which the information was collected.

How to contact Mondaq

If for some reason you believe Mondaq Ltd. has not adhered to these
principles, please notify us by e-mail at problems@mondaq.com and we will use
commercially reasonable efforts to determine and correct the problem promptly.